Oct. 26 (Bloomberg) -- Investors in Dubai bonds are demanding a premium at least seven times higher than before the real-estate slump and the credit crisis forced the Persian Gulf business hub to seek help from the country’s central bank. The sheikdom plans to sell five-year dollar and dirham- denominated bonds as part of a $6.5 billion medium-term fund- raising plan, according to three investors who have been approached for the sale. Dubai’s dollar bonds may be priced to yield 350 basis points to 400 basis points over the benchmark midswap rate, the investors said. The dirham bonds may be priced to yield in the “high” 300 basis points above the three-month emirates interbank offered rate, they said. The pricing compares with a 50 basis-point spread that the Dubai government paid in April last year for its 4 billion dirhams ($1.1 billion) non-rated five-year floating note. It’s also higher than the 230 basis-point premium that neighboring Abu Dhabi government-owned Tourism Development & Investment Co. paid for its five-year Islamic bond sold this month. One basis point is 0.01 percentage point. “This is a pricing sweet spot,” said Norval Loftus, head of sukuk and convertible bonds in London at Matrix Corporate Capital Ltd., which manages $2.5 billion in assets. “A high 300 basis point spread over swaps is the perfect pricing zone because as an investor you are being compensated very generously for the risks you are taking.” Real-Estate Boom Dubai’s bond sales are its first since the credit crisis ended a four-year real-estate boom, shutting the credit markets for the emirate. The sheikhdom and its government-linked firms have to meet $6.8 billion in debt obligations in the fourth quarter, Deutsche Bank AG said in a report last month. Property developer Nakheel PJSC needs to repay an Islamic bond, or sukuk, of $3.52 billion in December, and Dubai Civil Aviation Authority has to pay a $1 billion bond in November. The price of the bonds from Nakheel, a unit of the government-controlled Dubai World, climbed to a record 108 on the dollar today from as low as 63.45 cents in February, according to Royal Bank of Scotland Plc data on Bloomberg. Dubai’s sale includes both Islamic bonds and those which don’t comply with Muslim banking rules, according to offering circulars seen by Bloomberg News. The offering is separate from a $10 billion fund-raising program, which is part of a $20 billion support fund that the Dubai government set up for state- related companies. CDS Mitsubishi UFJ Securities International, Dubai Islamic Bank PJSC, Standard Chartered Plc and UBS AG are arranging the sale. The emirate and its state-related companies borrowed $80 billion to help transform the emirate into a financial services and tourist hub. The seizure of global credit markets had sparked concern the Dubai will be unable to repay some of its debt. The sheikhdom may borrow $1 billion to refinance Dubai Civil Aviation’s debt maturing next month, two bankers familiar with the transaction said last week. The cost of protecting Dubai bonds from default was unchanged today at 294 basis points, according to credit-default swap prices from CMA Datavision in London. The contracts, which fall as perceptions of credit quality improve, reached a year- low of 287 basis points last week after soaring to 976 basis points in February. Credit-default swaps, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point equals $1,000 on a swap protecting $10 million from default. To contact the reporter on this story: Haris Anwar in Dubai on Hanwar2@bloomberg.netLaura Cochrane in London at lcochrane3@bloomberg.net

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